Review of the Savings Taxation Directive
– Frequently Asked Questions

(see also IP/08/1697)

Why is the Commission proposing changes to the Savings Directive?

According to Article 18 of the Savings Directive, the Commission must report
to the Council on the operation of the Directive every three years and propose
any amendments to the Directive that may be required in order to better ensure
effective taxation of savings income.

Recent tax evasion cases have clearly demonstrated the importance of
international cooperation in the area of direct taxation, with a view to
preventing fraud and evasion linked to cross-border financial investments.

Tax fraud and tax evasion deprive Member States of the essential financial
resources. Today this problem is more acute than ever as governments will be
facing the first effects of the financial crisis. While well-off individuals
tend to benefit most from the existing loopholes in the Savings Tax Directive,
the first victims of tax fraud and tax evasion are the least mobile workers and
consumers who can face high taxation levels that the Member States introduce to
compensate for their losses.

What are the changes
proposed?

First, the Commission proposes to improve the Directive so as to better
ensure taxation of interest payments which are channelled through intermediate
tax-exempted structures.

For interest payments made by paying agents established in the EU to certain
intermediate structures established outside the EU, the Commission proposes that
those paying agents subject to anti-money laundering obligations are required to
use the information already available to them within this framework to establish
the actual beneficial owner of these payments. When the latter is an individual
resident in another EU Member State, the paying agent would consider the payment
concerned as directly made to this individual.

For interest payments made to certain untaxed intermediate structures
established within the EU, including some non-charitable trusts and foundations,
those structures will be always obliged to apply the provisions of the Directive
(exchange of information or withholding tax) upon receipt of any interest
payment from any upstream economic operator wherever established.

Second, the Commission proposes to extend the scope of the
Directive to income obtained from investments in some innovative financial
products with capital protection (less than 5% risk coverage) and in certain
life insurance products.

Third, the proposal brings a major reduction of administrative burden for
individuals who opt for exchange of information in Austria, Belgium or
Luxembourg where they receive interest payments and therefore claim exemption
from withholding tax. The proposal asks that the paying agent will directly
report information to the tax authorities, at the request of the individual who
authorize it, in place of levying the withholding tax.

Fourth, the Commission proposes to ensure a level playing field between all
investment funds or schemes, independently of their legal form.

Fifth, it proposes technical improvements which are beneficial for the
activity of paying agents, such as a clearer treatment of investment funds
established in a country different from the one of the paying agent and a
clearer guidance for Member States in order to avoid possible cases of
duplication of paying agent responsibilities.

What experience do you have on withholding tax till now?

The table below displays available information, for the countries levying a
withholding tax, about the amount of revenue shared with the other Member
States.

The sum of the tax revenue shared in 2006 by countries applying the
withholding tax regime is 500 million €. It corresponds to 75% of the
withholding tax collected by those countries applying the withholding tax
system. Given that 25% of the amount collected is kept by the country having
levied the withholding tax, the total tax withheld is about 670 million €.
If one assumes that the withholding tax was 15%, this would represent total
interest payments of about 4.5 billion €.

What experience do you have on exchange of information till now?

It has first to be noted that the data provided by Member States and other
jurisdictions covered by the savings taxation measures contain a critical number
of missing values. This leads to the problem that the data must be interpreted
with caution, since missing values significantly reduce the number of
observations for certain jurisdictions.

The data on information exchange from EU Member States and other
jurisdictions show that reported interest payments increased significantly
between the second half of 2005 and 2006. Unsurprisingly, the largest payments
can be found in the largest economies.

The total amount of interest payments made, for which information was
exchanged, is shown in the following table. It has to be stressed that it does
not correspond to any amount of tax collected. The Member States, having
been informed that interest payments were made to individuals resident on their
territory, have then applied, if appropriate, a tax according to their own tax
regime. Given that the tax regimes within the MS differ from each other, it
is impossible to give an estimation of the amount of money collected
corresponding to the interest payments reported

[ Figures and graphics available in PDF and WORD PROCESSED
]

Taking the very conservative assumption that the UK would report a similar
amount for the fiscal year 2006 to what it reported for the period between
July 2005 and April 2006, it can be extrapolated that the total of interest
payments made for which information was exchanged is 20bn € in 2006.

Do you have any data on money leaving the EU due to the application of the
Savings Directive?

The economic analysis made by the Commission has shown that:

the introduction of the Directive does not appear to have led to major
changes in the composition of savings incomes;

there has been an observable shift from countries within the scope of the
Directive towards third countries for deposits of depositors which are either
individuals or companies excluding banks. This development took place before the
Directive came into force. It has to be taken into account that currently
available statistics on international deposits do not allow to make a split
between the two types of depositor (individual depositors - subject to the
Directive and corporate depositors - not subject to the
Directive).

Doesn't this proposal create extra burden for paying
agents?

Not necessarily.

Under the money laundering Directive the paying agents should already have
the information requested.

Moreover, the introduction of the new annex (indicative compliance list) will
bring more clarity and legal certainty to paying agents. Furthermore, the
proposal contains technical improvements which are also beneficial for the
activity of paying agents, such as a clearer treatment of investment funds
established in a country different from the one of the paying agent and a
clearer guidance for Member States in order to avoid possible cases of
duplication of paying agent responsibilities. .

Given that the scope of the Directive is extended to ensure a level playing
field between equivalent products and intermediaries, it is clear that the
proposal will introduce new burden on some paying agents that are not yet in the
scope of the Directive (some trustees and some insurance companies).

Given the financial crisis, should the Commission not be more ambitious
and extend the exchange of information to income other than interest (such as
dividends ...)?

Some voices have called for a more radical extension of the scope of the
Directive to any kind of investment income. The Savings Taxation Directive may,
however, not be the most suitable framework for improving cooperation between
tax authorities for those items of income whose tax treatment varies
considerably between Member States (like dividends or capital gains from those
speculative financial instruments which do not provide substantial capital
protection).

Solutions based exclusively on the exchange of information would also seem
more appropriate for the purpose of ensuring that neither double taxation, nor
avoidance of any taxation, arise in relation to those life insurance contracts
where a significant share of the premiums paid serve to cover risks, or with
regards to pensions.

The Commission is currently working on a review of the Directive on Mutual
Assistance between the tax authorities of Member States (Directive 77/799/EEC)
that could improve the conditions for cooperation on these forms of income.
Proposals should be expected before the end of this year.

What about external competition (financial centres outside EU)? How will
the Commission proceed with the third countries which are currently part of the
Savings Tax network?

Once Member States agree on the ways of closing existing loopholes, the
Council is expected to ask the Commission to examine with non-EU countries and
jurisdictions participating in the mechanism as to how to update the respective
agreements in a similar way. However, it is premature to speculate today on how
they will react to our approach, as the EU first needs to reach a unanimous
agreement internally.

Following the request of the ECOFIN Council, the European Commission launched
discussions with selected important financial centres, namely Hong Kong,
Singapore and Macao in order to extend the geographical scope of the existing
Directive. The discussions are on-going at present and it is too soon to
anticipate their outcome.

Formal negotiations will start shortly with Norway, at its request, whilst
other jurisdictions like Bermuda and Iceland have shown interest in
participating in the savings taxation arrangements.

Is the Commission creating a black list of countries through Annexes
provided in the amendments?

NO! Annex 1 of the proposal does not have anything to do with the so-called
"black-list" of tax heavens. Annex 1 is based on an analysis of the tax regime
of the specific entity or legal arrangement in the corresponding named
jurisdiction mentioned. Only those entities and legal arrangements to which EU
resident individuals can have access as beneficial owners and which are not
subject to effective taxation on their income in that jurisdiction are mentioned
in the list. Its purpose is to facilitate the job of the paying agents in
executing the application of the Directive. Appropriate procedures are provided
to amend the list if the information contained in it needs to be updated.

To which income does the Commission propose to extend the scope of the
Directive?

The Commission proposes to extend the scope of the Directive to cover
substantially equivalent income derived from those products that, from the
investor's viewpoint, can be regarded as equivalent to debt claims because their
risk is known and is not higher than that of debt claims.

Therefore, the proposal extends the scope of the Directive to the following
products:

securities where the investor receives: a) a return on capital whose
conditions are defined at the issuing date; and b) a guarantee where, at the end
of the term of the securities, at least 95% of the capital invested will be
reimbursed. All securities meeting these two conditions will be included in the
scope, regardless of whether the underlying assets behind those securities
include debt claims or not. Typical examples are structured products like those
"index linked certificates" whose performance is defined ex ante as being a
function of the possible positive trend of a market indicator or to the
increase in value of a basket of underlying securities, whilst the possible
negative results of the market indicator or of the underlying securities has no
or minimal influence on the right for the holder to be reimbursed the capital
invested;

those life insurance contracts whose positive performance (beyond the
guarantee of reimbursement of the capital invested) is strictly linked to income
from debt claims or equivalent income and where the mortality or longevity risk
covered under the contract is merely ancillary (lower than 5% of capital insured
as an average over the duration of the contract).

The possibility
to include a positive list with the products that meet these criteria was
eventually discarded for practical reasons, associated with the rapid
developments in the financial markets that would very quickly make the list
obsolete: any updating of the list would come too late. The Commission considers
that the above described criteria for identifying the products concerned provide
enough clarity to paying agents and that a detailed list is not necessary.

What will be the consequences for those who receive money from
foundations?

If the trust or foundation (or other equivalent entity on arrangement) is
established outside the EU in a jurisdiction listed in annex I of the Directive
(because it is untaxed), the Commission proposes that the paying agents
established in the Union and subject to anti-money laundering obligations would
be required to use the information already available to them within this
framework to determine the effective beneficial owner of these payments. When
the latter is an individual resident in another EU Member State, the paying
agent would consider the payment concerned as directly made to this individual,
without taking into account the formal transit of the payment through the
intermediate structure. For instance, if a bank established within the EU pays
interest to a trust established in Switzerland or in Hong-Kong and if it knows,
under the anti-money-laundering provisions, that the effective beneficial owner
of the trust is an individual resident in the EU, the bank will be required to
apply the provisions of the Directive at the time of the payment to the trust as
if this payment was directly made to this individual.

If the trust or foundation (or other equivalent entity or arrangement) is
established within the EU and is not taxed on its income under the general
rules for direct taxation applicable in the Member State, the provisions of the
Directive (exchange of information or withholding tax) should apply upon receipt
of the payment by this entity. To facilitate the task of economic operators, the
Commission has established a first list of such entities or arrangements
established in the EU. This list is to be found in annex III of the directive
and will be completed and updated with the assistance of Member States in the
framework of a Committee. For instance, if a trust established within the EU
receives interests from an economic operator (bank, financial institution,
independent professional) wherever established, it will be obliged to apply the
provisions of the Directive (exchange of information or withholding tax) upon
receipt of the payment, regardless of the actual distribution of any sum to the
individual beneficial owner.

What does the Commission propose
with regard to investment funds?

Currently, income obtained by individuals through some investment funds
(mainly investment funds subject to the UCITS Directive) is already within the
scope of the Directive. The Commission proposes to extend the scope of the
Directive to all investment funds or schemes, wherever located and independent
of their legal form and regulatory regime, having invested in debt claims or
other equivalent securities.For this purpose, all the current
references to the UCITS Directive for investment funds established in the EU
will be replaced by a reference to the registration of the fund in accordance
with the domestic rules of any of the Member States; for investment funds
established outside the EU, a broad definition of investment funds or schemes
based on concepts prevailing at OECD level will be used.